The real exchange rate, innovation and productivity

Author(s)
Laura Alfaro, Alejandro Cunat, Harald Fadinger, Yanping Liu
Abstract

We build a dynamic heterogeneous-firm model in which real depreciations raise export demand and the cost of importing intermediates, and also affect borrowing constraints and the profitability of engaging in research and development (R&D). A number of stylized facts on manufacturing firms for a large set of countries discipline our estimation: Firms in emerging East Asia are very export oriented and rely little on imported intermediates, whereas the opposite holds for Latin America and Eastern Europe; firms from industrialized countries export as much as they import. Exporters experience an increase in cash flow, R&D, and productivity growth in response to real exchange rate (RER) depreciations; importers experience the opposite outcomes. In counterfactual simulations of temporary RER movements, the effects on innovation and productivity growth are heterogeneous across regions, sizeable and persistent. In emerging Asia, real depreciations are associated with higher probabilities to engage in R&D, faster growth of average firm-level productivity and cash flow, and higher export entry rates; we find negative average effects on these outcomes for firms in other emerging economies, and no significant average effects for firms in industrialized economies.

Organisation(s)
Department of Economics
External organisation(s)
Harvard University, Cornerstone Research, Universität Mannheim
Journal
Journal of the European Economic Association
Volume
21
Pages
637-689
No. of pages
53
ISSN
1542-4766
DOI
https://doi.org/10.1093/jeea/jvac058
Publication date
2022
Peer reviewed
Yes
Austrian Fields of Science 2012
502003 Foreign trade, 502008 Development economics
Keywords
ASJC Scopus subject areas
Economics, Econometrics and Finance(all)
Portal url
https://ucris.univie.ac.at/portal/en/publications/the-real-exchange-rate-innovation-and-productivity(86a15216-2b83-4093-a992-babca8f9fe4e).html